A B C D E F G H

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6 Situation
7 Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the
8 acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer
9 programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of Biggerstaff &
10 McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free
cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term
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investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital
12 (WACC) is 11%. Answer the following questions.
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15 FILL ALL GREEN BOXES
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18 a. Use B&M’s data and the free cash flow valuation model to answer the following questions.
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20 INPUT DATA SECTION: Data used for valuation (in millions)
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22 Free cash flow $24.0
23 WACC 11%
24 Growth 5%
25 Short-term investments $100.0
26 Debt $200.0
27 Preferred stock $50.0
28 Number of shares of stock 10.0
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30 (1) What is its estimated value of operations?
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Vop =
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38 Vop = #DIV/0!
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40 (2) What is its estimated total corporate value?
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42 Value of Operation
43 Plus Value of Non-operating Assets
44 Total Corporate Value $0.0
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46 (3) What is its estimated intrinsic value of equity?
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48 Debt holders have the first claim on corporate value. Preferred stockholders have the next claim and the remaining is left to
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51 Total Corporate Value
52 Minus Value of Debt
53 Minus Value of Preferred Stock
54 Intrinsic Value of Equity $0.0
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 A B C D E F G H
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57 (4) What is its estimated intrinsic stock price per share?
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59 Intrinsic Value of Equity
60 Divided by number of shares
61 Intrinsic price per share #DIV/0!
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Estimating the Value of R&R’s Stock Price (Millions, Except for Per Share
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Data)
65 INPUTS:
66 Value of operations = #DIV/0!
67 Value of nonoperating assets = $100.00
68 All debt = $200.00
69 Preferred stock = $50.00
70 Number of shares of common stock = 10.00
71 ESTIMATING PRICE PER SHARE
72 Value of operations #DIV/0!
73 + Value of nonoperating assets 100.00
74 Total estimated value of firm #DIV/0!
75 − Debt 200.00
76 − Preferred stock 50.00
77 Estimated value of equity #DIV/0!
78 ÷ Number of shares 10.00
79 Estimated stock price per share = #DIV/0!
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83 f. You have just learned that B&M has undertaken a major expansion that will change its expected free cash flows to −$10
84 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. No new
debt or preferred stock were added, the investment was financed by equity from the owners. Assume the WACC is unchanged at
85 11% and it that there are still has 10 million shares of stock outstanding.
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89 R&R's explicit forecast:
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91 Year 0 1 2 3
92 FCF
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94 After Year 3, gL = 5%
95 WACC = 11%
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97 R&R's horizon value:
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HV3 = Vop,3 =
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HV3 = Vop,3 =
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105 HV3 = Vop,3 = #DIV/0!
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 A B C D E F G H
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109 After estimating the horizon value, you can estimate the current value of operations by following these steps: (1) Find the
110 present value of the FCFs from the explicit forecast, discounted back to Time 0 at the WACC; (2) find the present value of the
horizon value, discounted back to Time 0 at the WACC; and (3) sum the PV of the FCFs and the PV of the horizon value. This
111 sum is the present value of all future FCF from Time 0 to infinity, discounted back to Time 0. Therefore, this sum is the current
112 value of operations, Vop,0.
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115 Year 0 1 2 3 4 5 …t
116 FCF FCF1 FCF2 FCF3
117 PV of FCF in explicit forecast ←↵ ←↵ ←↵
118 FCF3(1+gL) FCF4(1+gL) FCFt(1+gL)
119 PV of HV is the PV of FCF beyond the HV3 ←↵ ←↵ ←↵
120 explicit forecast ←↵ ←↵ ←↵
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123 B&M's Value of Operations (Millions of Dollars)
124 INPUTS:
125 gL = 5.00%
126 WACC = 11.00% Projections

127 Year 0 1 2 3 4

128 FCF
129 ↓ ↓ ↓
130 FCF1 FCF2 FCF3
131 ────── ────── ──────
132 (1+WACC)1 (1+WACC)2 (1+WACC)3
133 HV = Vop,3
134 FCF3(1+gL)
135 ─────────
136 PVs of FCFs (WACC− gL)
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138 PV of HV
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140 Vop = $0.00
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143 (2.) What is its value of equity on a price per share basis?
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Estimating the Value of B&M’s Stock Price (Millions, Except for Per Share
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Data)
147 INPUTS:
148 Value of operations = $0.00
149 Value of nonoperating assets =
150 All debt =
151 Preferred stock =
152 Number of shares of common stock =
153 ESTIMATING PRICE PER SHARE
154 Value of operations $0.00
155 + Value of nonoperating assets 0.00
156 Total estimated value of firm $0.00
 A B C D E F G H
157 − Debt 0.00
158 − Preferred stock 0.00
159 Estimated value of equity $0.00
160 ÷ Number of shares 0.00
161 Estimated stock price per share = #DIV/0!
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〖𝐇𝐕〗 _𝟒= ( 〖𝐅𝐂
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𝐅〗 _𝟒
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(𝟏+𝐠_𝐋))/((𝐖𝐀𝐂
𝐂 − 𝐠_𝐋))
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 〖𝐇𝐕〗 _𝟒= ( 〖𝐅𝐂
𝐅〗 _𝟒
(𝟏+𝐠_𝐋))/((𝐖𝐀𝐂
𝐂 − 𝐠_𝐋))
A B C D E F G H
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�
�
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 ̂
𝐏 ̂_𝟎
𝐫 ̂_𝐬 𝐏 ̂_𝟎 𝐏 ̂
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== = _𝟑
234 �
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 I J
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ed fields, 7
including the
d computer8
chase of Biggerstaff
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&M currently
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eport short-term
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rage cost of capital
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48is left to
remaining
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 I J
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sh flows 83
to −$10
at a rate of
845%. No new
WACC is unchanged at
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 I J
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eps: (1) Find
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present value
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horizon value. This
his sum is111
the current
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 I J
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